Mortgages and Credit Scores
How would you like to pay $170,000 more than you had to for a house? Most Americans do not realize how much a low credit score is costing them, particularly when it comes to mortgage loans. The table below shows the average interest rate one would pay for a mortgage loan as of September 2005 based on various credit scores. Note that interest rates vary from week-to-week and from state-to-state. The current mortgage interest rates as you are reading this article are not the same as the ones presented in the table below.
The table indicates that people with low credit scores will pay about $172,000 more for their homes and their monthly payments will be about $475 higher! Think of how big your retirement nest egg would be if you invested that $475 each month in a retirement account for 30 years! This is why your goal should be to acquire a credit score of at least 720, but ideally 750 or higher.
$200,000, 30-year Mortgage
| Credit Score | APR | Monthly Payment | Total Interest — 30 Years |
|---|---|---|---|
| 720 – 850 | 5.79% | $1173 | $222,140 |
| 700 – 719 | 5.92% | $1189 | $227,888 |
| 675 – 699 | 6.46% | $1258 | $253,007 |
| 620 – 674 | 7.61% | $1413 | $308,670 |
| 560 – 619 | 8.53% | $1542 | $355,200 |
| 500 – 559 | 9.29% | $1651 | $394,362 |
No matter how low your credit score is today, you can begin work on improving it and eventually obtain a high credit score.
Today, credit scoring plays a big role in determining whether your mortgage loan is approved and at what interest rate. Keep in mind that obtaining a mortgage loan just one point less results in a savings of about $5,000 on the average 15-year mortgage, and much more on a 30-year mortgage. Therefore, it pays to have a credit score as high as possible to enjoy the lowest rate available. Lenders have discovered that there is a direct correlation between credit scoring and the odds of your becoming delinquent on your monthly mortgage payments. Consider the following:
| Credit Score | Odds of Becoming 90 Days Delinquent |
|---|---|
| 780 | 576 to 1 |
| 700 | 288 to 1 |
| 680 | 144 to 1 |
| 660 | 72 to 1 |
| 645 | 36 to 1 |
| 630 | 18 to 1 |
| 615 | 9 to 1 |
| 600 | 4 to 1 |
| 585 | 2 to 1 |
As the above table illustrates, those with credit scores below 615 are a very poor risk for any lender.
Research has shown that there is a strong correlation between credit scores and repaying debt. The higher a person’s credit score, the more likely they are to pay the debt.
Editor’s Note:
We at Jewelry Outlet always want to remind our customers why it is important for them to obtain and responsibly use credit. One helpful way to improve one’s credit is by adding a trade line and then only using a small portion of the trade line. This is an example of utilization, which is 30% of the credit score calculation. Thus with a top score of 850, the utilization category is 255 points of the total credit score (850 x .30).
If someone had one department store trade line of $500, but had maxed out the trade line by charging $500 of goods and services, then this person would lose almost all of the 255 points (out of 850), having a very high utilization of 100%. Thus assuming all other things on the person’s credit report were good, the highest credit score this person could achieve might only be 595 (850 – 255), as this person might lose all points for having a high utilization.
But if this person obtained another trade line (maybe a jewelry store account) for $5,000, now the person’s utilization would be only 9% ($500/$5,500). Thus this person’s credit score would increase, maybe by as many as 200+ points, possibly bringing the score up to over 800.
The person’s interest rate on an auto loan with a 595 score might be as high as 20%, whereas the interest rate with an 800 credit score might only be 2% to 5%. If someone purchased a $20,000 car, the lower interest rate would save $250 per month, for having good credit and low utilization.
This is the power of low utilization. And this why it is important to obtain a jewelry store trade line with a high limit.
Jewelry Outlet is the number one online jewelry retailer to help you enhance, establish and/or rebuild your credit. We offer easy credit terms for people with bad credit, new credit and no credit. Click here to Apply for Credit
Posted by Christian C Culpepper